ACCM4300 - Financial Accounting: Consolidation of Foreign Subsidiaries

This report discusses the technical aspects of consolidating financial statements, focusing on intra-group transactions and the accounting of foreign subsidiaries, particularly in the context of OZ Minerals. It highlights the importance of properly accounting for intra-group transactions to avoid overstatement or understatement of financial reports, emphasizing the need to eliminate unrealized gains or losses. The report also addresses the translation of foreign subsidiaries' financial statements into the reporting currency, adhering to IAS 21 guidelines for exchange rate conversions and recognizing gains or losses from exchange rate changes. The presentation section summarizes the key topics discussed, including intra-group transactions, balances, and the accounting of foreign subsidiaries, with a conclusion that emphasizes the need for careful treatment of these elements for fair financial statement presentation.

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Contents
BRIEF......................................................................................................................................................3
TECHNICAL ASPECTS OF CONSOLIDATION.............................................................................................3
PRESENTATION......................................................................................................................................5
CONCLUSION.........................................................................................................................................5

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MEMORANDUM TO : Board of Directors
FROM : Team Assignment
SUBJECT : Consolidation of intra-group transactions and accounting of
foreign subsidiaries
BRIEF:
OZ Minerals is engaged in the business of mining. Its main focus is on extraction of Copper.
Apart from the copper it also operates the mining of gold and silver. This company is the
third largest company of Australia in copper production. The main goal of the company is to
create the values to its shareholders.
TECHNICAL ASPECTS OF CONSOLIDATION:
i) Intra-group Transactions and Balances: A group comprises the number of
companies. There may a case, where such companies under the group undertake
the transactions. Such types of transactions among such companies are called as
intra-group transactions. At the time of consolidation, financial statements of such
companies are put together and consolidated results are generated. But in this
process intra-group transaction plays a vital role as their accounting treatment
become critical. If transaction is general such as sale, purchase etc. then there will
be no such difficulty in the consolidation (Velocity, 2012). In general, these
transactions do not affect the consolidated financial statement as these have no
any existence.
For Example: A company purchases the material from the other company. The
purchasing company will book the purchase in the income and expense statement
and payable in balance sheet. On the other side, selling company will book the
sales in income statement and receivables in the balance sheet. This transaction
has its separate identity for each company. But for the purpose of consolidation it
has lose its identity as transaction between the companies become reciprocal to
each other and intra-group balance will be null.
But, we always cannot say that balance of intra-group transaction will be null.
There may be some factors that may cause such reasons, some of which are as
under:
a) Reporting dates are differs
b) Sales is booked as fixed assets by the other company
c) Profit margin on sales
During the consolidation, we should be aware of these types of factors, avoidance
of which cause the overstatement or understatement of the financial reports. So, it
should be taken care of.

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For Example: In the above example, purchasing company will the purchase as part
of cost in the income and expense statement. But the selling company will book it
as sales, at which it has a decided margin. It means it has booked the profit margin
in the books. At the time of consolidation, the transaction will have no substance
except the profit margin. Such profit has not actually been earned. So, it should be
eliminated from the consolidated financial statement.
In the present case, the company OZ Minerals has number of subsidiaries which
operates worldwide. Such companies have entered into various transactions during
the year. According to Annual Report 2017, the intra-group transaction balance is
nil and unrealized gain or losses have been removed for the purpose of
consolidation of financial statement (OZMinerals, no date).
The second thing is that the importance of intra-group transaction in the
consolidation process. From the above discussion it is clear that intra-group
transaction should be treated carefully and difference therein should be properly
reconciled. Otherwise, there would be an overstatement or understatement of
financial statement of a group as a whole. As such, for the better presentation of
the financial statements of the group, intra-group transaction should be dealt with
carefully.
ii) Accounting of Foreign Subsidiaries: It may be a case where the company has
foreign subsidiary. Foreign Subsidiary means a company which is situated outside
the country of parent company. In this type of case both holding as well as
subsidiary, makes financial statement in own currency. At the time of
consolidation both the financial statements are merged. The data of both the
financial statement are converted into the currency of holding companies financial
statement. Hence consolidated financial statements are prepared in reporting
currency i.e. currency of holding company (Vernimmen, no date).
At the time of consolidation process, financial statements of subsidiary are
converted into currency of holding company. In this process gain or loss on
exchange is arise. It will be reported into the consolidated financial statement as
gain or loss from change in exchange rates.
For Example if a company is located in India (Subsidiary Company) and second
company is in USA (Holding Company). Indian Company will prepare its
accounts in Indian currency and USA Company will prepare in own currency. At
the time of consolidation, data of Indian Currency will be converted into USA
Company data.
For the purpose of conversion of currency, we need rates. Rates of which dates are
required to be considered are given into the IAS 21. IAS 21 provides the
mechanism of reporting of financial transaction relating to foreign exchange rates.
It provides the following rates should be used to convert the foreign subsidiary
transaction:

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a) Assets and Liabilities are converted at the rate of reporting date.
b) Income and expenses are converted at the rate prevailing on the date of
transaction.
c) Equity is converted at the rate of reporting date etc.
In the present case, OZ Minerals is Australia based company and its financial
statements to be prepared in Australian Dollar. The company has lot of
subsidiaries some of them are located outside the country i.e. located in
Singapore, USA etc. The Financial Statements of these foreign subsidiaries, to
be translated in the currency of holding company. The company has translated
the foreign currency financial statement of foreign subsidiaries in the reporting
currency and any exchange gain or loss, have been recognised as per IAS 21.
PRESENTATION:
In this section we are presenting the above discussion. The topics, which we have discussed,
are as under:
a) Intra-group transaction and Balances
b) Accounting of Foreign Subsidiaries
More details in PPT.
CONCLUSION:
In nut shell we can say that at the time of consolidation, intra-group transactions become
reciprocal to each other and balance thereof become null. But, there may be differences
which should be dealt with properly for the fair presentation of the consolidated financial
statement.
On the other side, financial statement of foreign subsidiaries should be translated to the
currency of holding company and any exchange gain or loss is recognised or treated
according to IAS 21.
CONSOL:
TEAM

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REFERENCES:
OZMinerals (no date), Annual Report 2017 [Online] Available from:
https://www.ozminerals.com/uploads/media/OZMinerals_2017_Annual_and_Sustainability_
Report.pdf [Assessed 02 September 2018]
Silvia (no date), Consolidation with foreign currencies [Online] Available from:
https://www.ifrsbox.com/foreign-currency-consolidation-example-ifrs/ [Assessed 01
September 2018]
Vernimmen (no date), Definition for: Intra-group transaction [Online] Available from:
http://www.vernimmen.com/Practice/Glossary/definition/Intra-group%20transactions.html
[Assessed 01 September 2018]
Velocity (2012), Intra-group Transaction [Online] Available from:
http://www.cimaglobal.com/Pages-that-we-will-need-to-bring-back/velocity-archive/
Velocity-e-magazine/Velocity-2012/Velocity-December-2012/F1-Cathy-Sibley-on-intra-
group-transactions-/ [Assessed 01 September 2018]

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APPENDIX:

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